Is economy merely suffering from a cold?

Bulls blame bad weather for weak growth, but bears see same old problems

WASHINGTON (MarketWatch) — The state of confusion about the U.S. economy boils down to one question: How much is bad weather responsible for a slowdown in growth in early 2014?

Bullish forecasters put virtually all the onus on the weather. Consumers put off purchases of autos, homes and other items while they stayed off the roads and hunkered down inside. Many businesses also experienced major disruptions. The Great Lakes mostly froze over for the first time in over a decade, for example, and that put shipments of critical raw materials such as coal and iron ore on ice.

“The bears are right when they say it’s not just the weather,” said Neil Dutta, head of economics at Renaissance Macro Research. “But it’s mostly about the weather. It’s really gasping for straws to think otherwise.”

Skeptics who see little change in the underlying pace of U.S. growth — a mediocre 2% or so — acknowledge the dampening effect of wintry weather. Yet they also see signs the economy is reverting to its post-recession pattern of up-and-down growth. They point to sluggish wages, softer consumer spending and business investment, and a housing market that was starting to cool off even before the weather did. Read: Why skeptics don’t see faster growth in 2014.

The latest batch of data this week, unfortunately, won’t add much clarity to the debate.

Americans probably won’t show a lot more confidence in the economy, a pair of consumer surveys is likely to indicate. Sales of new homes are projected to fall in January because of the harsh weather. And the sharp markdown that’s expected in fourth-quarter growth figures won’t tell us a whole lot about what’s going on in the new year.

It could be months before the true direction of the economy becomes visible again.

“It may not be until April or May before we get numbers that give us a good sense of where we are,” said Steve Blitz, chief economist at ITG Investment Research.

The one, true path

Why will it take so long to figure out the economy’s truth path? If history is a guide, growth will snap back in March and April. Much of the economic activity that normally would have taken place in the first two months of the year such as clothes purchases or coal deliveries will now occur in the spring.

Consider the housing market. Sales and construction softened dramatically in January and more of the same appears in store for February. Yet sales usually pick up in the spring as warm weather returns and the market could get another jolt from pent-up demand that accrued during the stormy months.

If that scenario plays out across most sectors, the economy could surge in the spring and imply a sharp acceleration in growth. Yet the rebound in the economy in the second quarter might mainly reflect a catchup from the first quarter’s weather-induced weakness.

Put another way, slower growth now and faster growth later would both be misleading. Put the two periods together and that would give us a better idea of the economy’s actual strength.

Yet like just in a TV informercial, there’s more. The government's first update to its fourth-quarter growth tally could also skew the picture of the economy’s health in the first three months of 2014.

Let’s review. The government initially said fourth-quarter gross domestic product expanded by a robust 3.2% after a 4.1% gain in the third quarter, marking the fastest six-month stretch of growth in almost two years. The GDP report fueled hopes that 2014 would turn out to be a breakout year, with annual growth reaching 3% for the first time in nine years.

Alas, the fourth quarter doesn’t look so hot now. Growth is expected to be trimmed to 2.4% or even less on Wednesday because exports, housing and inventory restocking were not as strong as originally believed.

If fourth-quarter growth is downgraded, however, the result could be a bigger GDP number for the first quarter than the 1.9% now forecast despite poor weather. How so? Big inventory buildups like the record increases in the third and fourth quarters add to GDP, but they are usually followed by slower production in following quarters that reduce the pace of growth.

The result: a smaller inventory buildup in the fourth quarter means less of an inventory drag in the first quarter.

Crux of debate

All the yo-yoing in the economic bellwethers, however, fails to get to the heart of the matter. Bad weather will pass and the path of the economy will depend as it always does on the pace of job creation and wages gains.

Bullish economists believe the economy will resume adding jobs in a steady range of 200,000 a month. That will pump more money into the economy and force businesses to raise wages as the pool of available labor shrinks.

“Once unemployment comes down, wages will pick up,” Dutta said. “Companies will have to offer more to attract talent and consumer spending will strengthen.”

Ergo, that’s how the economy gets to 3% growth — or faster.

The vastly outnumbers bears don’t buy in. Blitz, for his part, argues that consumers and businesses still have excessive debt and they are not ready to return to their old ways of spending. The pace of hiring fast is not enough to boost sluggish wage growth and businesses are unwilling to commit to faster investment until they’re sure it will lead to bigger profits.

“The issue here isn’t boom or bust. The question is, are we going to see 2.5% growth or 3.5% growth,” Blitz said. “The bulls believe it’s most the weather and we’ll see the 3% economy. I remain skeptical.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.